- Case Type:
- Case Status:
- 15-3190 (10th Circuit, Dec 06,2016) Published
Since fraudulent transfer statutes are for the protection of unsecured creditors, courts measure the value received in terms of the effect on those creditors and value encompasses more than just the cash exchanged in the transaction; it includes satisfaction of a present or antecedent debt of the debtor because when such a debt is extinguished, the remaining creditors benefit because the satisfied creditor is no longer competing for the debtor’s property.
- Procedural context:
Debtor sought to avoid a sale of property as fraudulent on the ground that it did not receive reasonably equivalent value in exchange. The bankruptcy court granted summary judgment against the debtor and the 10th Circuit BAP affirmed. Since this was an appeal from the BAP, the 10th Circuit reviewed bankruptcy court's decision. Matters of law reviewed de novo and factual findings reviewed for clear error.
The 10th Circuit held that amount received by debtor by the sale plus the extinguished mortgage was reasonably equivalent value in exchange and rejected debtor's argument that the mortgage had not been extinguished since it had been assigned subsequent to closing. The 10th Circuit held that since the foreclosure action was dismissed with prejudice, the debt was extinguished.
Debtor was formed to develop property in Tulsa, Oklahoma. Part of its original funding was a $500,000 loan from the E.H. Hawes Revocable Trust (the “Hawes Trust”). In 2007 Debtor purchased a property with a loan secured by a mortgage on the property. The loan went into default and a foreclosure action was commenced that Debtor did not defend, opting instead to find a buyer. Debtor agreed to sell the property to Cornerstone Creek Partners, LLC (“Cornerstone”) for $3 million contingent on delivery of free and clear title.
The property was encumbered by a mortgage of over $7.7 million and other liens totaling $499,740.29. To effect the closing, the mortgagee released the mortgage and dismissed the foreclosure action with prejudice, and several lienholders dismissed their claims against the property and debtor. No judgment was entered.
Of the sale proceeds, $686,000 went to debtor’s unsecured creditors including $415,000 to the Hawes Trust, and $261,477 went to debtor. After closing, the Hawes Trust took assignment of the loan secured by the property.
Eleven days after purchasing the property, Cornerstone sold it for $4.4 million. An involuntary chapter 7 bankruptcy was filed against debtor which case was subsequently converted to chapter 11 and debtor commenced the action to set aside the sale.
- Hartz, Bacharach, McHugh (Hartz)
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